Sprouts Wins by Flipping the Margin Model

Sprouts was chosen by SN’s editorial staff based on the company’s strong financial performance, its aggressive growth and its bold re-thinking of the supermarket model to position itself on the leading edge of some key consumer trends.

As Doug Sanders, president and chief executive officer of Sprouts, told analysts in a recent earnings conference call, Sprouts has been successful by “flipping the conventional supermarket model.”

“We use our massive fresh produce department in the center of our store to drive traffic, and then offset our price investment in produce by surrounding it with differentiated departments such as bulk foods, packaged grocery and vitamins to blend to the solid margin that still allows us to offer the best prices in the markets we serve,” he explained.

It’s a model that conventional operators have a tough time competing with, Sprouts executives explained in the call, because such operators find it difficult to lower their produce margins to Sprouts’ levels for a sustained period.

Sprouts has other advantages as well — its 28,000-square-foot boxes are well-designed and easy to navigate, it offers enough selection for customers to do a full shop, and its employees are well-trained and knowledgeable.

Sprouts in many ways has positioned itself squarely in a “sweet spot” where health and wellness, local sourcing, organic and natural product, customer service, value and convenience all come together. Those are targets conventional operators are aiming for, but are approaching in different ways with varying degrees of success.

While the Sprouts banner first appeared in 2002, the company’s origins date back to 1943, when Henry Boney began selling produce in San Diego. He later founded Henry’s Farmers Market, which underwent a few ownership changes before merging in 2011 with Sprouts, also founded by the Boney family.

So the Sprouts model is time-tested. Whether or not it will continue to endure as the company expands its store base at a rapid clip is anybody’s guess. But if consumer trends continue in their current direction, Sprouts appears to be onto something that conventional operators need to pay close attention to.